Elias wants to perform an after-tax evaluation of equivalent methods A and B to
ID: 2805249 • Letter: E
Question
Elias wants to perform an after-tax evaluation of equivalent methods A and B to electrostatically remove airborne particulate matter from clean rooms used to package liquid pharmaceutical products. Use classical SL depreciation with n=5 years to evaluate the alternatives below where after-tax MARR is 10% per year, and Te =35%. Which alternative should be selected?
Method A Method B First cost -100000 -150000 Salvage value 10000 20000 Saving per year 35000 45000 AOC per year -15000 -6000 Expected life, years 5 5Explanation / Answer
Method A Year Initial Outflow BTCF Depn PBT Tax at 35% PAT Depn OCF FCF Disc Fact 0 -1,00,000 -1,00,000 1 -1,00,000 1 20,000 18,000 2,000 700 1,300 18,000 19,300 19,300 0.909091 17,545 2 20,000 18,000 2,000 700 1,300 18,000 19,300 19,300 0.826446 15,950 3 20,000 18,000 2,000 700 1,300 18,000 19,300 19,300 0.751315 14,500 4 20,000 18,000 2,000 700 1,300 18,000 19,300 19,300 0.683013 13,182 5 10,000 20,000 18,000 2,000 700 1,300 18,000 19,300 29,300 0.620921 18,193 -20,629 Method B Year Initial Outflow BTCF Depn PBT Tax at 35% PAT Depn OCF FCF Disc Fact 0 -1,50,000 -1,50,000 1 -1,50,000 1 39,000 26,000 13,000 4,550 8,450 26,000 34,450 34,450 0.909091 31,318 2 39,000 26,000 13,000 4,550 8,450 26,000 34,450 34,450 0.826446 28,471 3 39,000 26,000 13,000 4,550 8,450 26,000 34,450 34,450 0.751315 25,883 4 39,000 26,000 13,000 4,550 8,450 26,000 34,450 34,450 0.683013 23,530 5 20,000 39,000 26,000 13,000 4,550 8,450 26,000 34,450 54,450 0.620921 33,809 -6,989 Since NPV loss in case of Method B is lesser as compare to Method A so Method B should be selected
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